Monday, July 22, 2013

Explaining Personal Loans in Singapore [Guest Post]

The following post is contributed by I'm glad to be able to work with them to reach out to more readers on subjects related to financial planning and investments. You may have seen previous posts on housing loans which was also contributed by them. Some of my blog posts on SG young investment has also been featured on imoney site.

imoney started out in Malaysia and is now branching out to Singapore also. Their malaysia website has seen over 24k likes on their facebook page and the Singapore site which just started has already got 304 facebook page likes. Click here to access imoney site

Here is the post on personal loans:

Personal loans have become very popular and common in Singapore in the last decade. But what exactly is a personal loan and how does it work? A personal loan is an unsecured loan that is meant for personal usage – this means the bank won’t ask any explanation on what you are using the money for. As these loans are unsecured (meaning the bank does not ask for collateral) the interest rates will usually be higher than those on secured loans (car loans, mortgages, etc.). Another characteristic of personal loans is that they are short term, usually somewhere between 1 and 5 years, which means they are repaid much quicker than a mortgage, for example.
The question that naturally comes next is: if there is no collateral, what are the other criteria that banks look at to determine the loan amount? In Singapore, the banks look at your monthly income and usually determine the amount you can borrow as a multiple of that number. For example, if you earn S$5,000 per month and the bank offers up to 5x you income, you are eligible to borrow up to S$25,000. What about the costs associated with the loan? In addition to the interest rate, the banks usually charge an annual fee, somewhere between S$50 and S$90. Adding the two costs together will show what the total expense associated with a particular loan package is.
When Should You Consider Taking a Personal Loan?
While it might be tempting to take a personal loan to buy a new TV or take a nice holiday, for example, you should really consider whether it is worth doing so. The interest rates on personal loans in Singapore are high (between 9% and 18%) so you will most probably end up greatly overpaying that TV or holiday and regretting it later on. Personal loans are thus not the best way to finance such “entertainment” expenditures.
So when is taking a personal loan a good idea? There are a few occasions where a personal loan can actually help you reduce costs. One of those occasions is called debt consolidation. Debt consolidation simply means taking a personal loan in order to merge more of your outstanding loans into one, usually at a lowest interest rate. Another occasion where you might want to consider a personal loan is to cover a large credit card debt. As credit cards have incredibly high interest rates it makes sense to repay that debt with a loan that provides lower ones in order to save money.
Ultimately it makes sense to take a personal loan for things that will help you generate more income or create savings in the future. In addition to the two reasons mentioned above, other appropriate situations might be acquiring a professional education or investing in an asset that is quickly appreciating in value. If you think you are in need of a personal loan, be sure to compare the personal loans that are on offer by banks in Singapore!
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  1. Do you think it would be worth it to take a personal loan for the purpose of buying shares?

    1. Hi Muhammad Nor IRZUAN Norimzan,

      I do not encourage getting a loan for the purpose of buying shares. As you can see from the article, personal loans have interest between 9%-18%. You have to consider this interest rate when borrowing as the returns you make from shares will be offset against this interest rates that you pay. You have to make 9% from shares just to break even!

      If you do want leverage to buy shares, you can consider CFDs. You can use CFDs to buy shares just by putting 10% of the total shares cost. However, CFDs are derivatives and in a sense are more complicated products. You can check out cityindex which offers CFD trading. Do be warned that leverage can increase your earnings but can also widen your losses. It is best to only invest using the money you have. :)

  2. Very happy to see your blogs, I really gets motivate to read your blogs and agree with your point of view.
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